IRS required commitment to fully fund terminating CB plan

[shERPA]

CB plan terminated 12/31/14. Sponsor was a C-corp medical group with 12 Dr participants, all shareholders. No NHCEs employed at all. Sponsor ceased all operations 12/31/14 as the practice was merged into a larger group (corporation itself was not merged).

Sponsor funded the 12/31/14 contribution and submitted the plan for a DL in 2015. During the DL review, IRS asked sponsor to sign a statement that said "if the assets are not sufficient as of the distribution date, I will contribute any amount necessary to satisfy all benefit liabilities". Plan is NOT PBGC covered.

Sponsor signed the statement not understanding that this could require a contribution beyond the 2014 contribution. DL was issued recently, now ready to start distributions, plan is about 5% underfunded. They can't fund the 5% because the sponsoring corp has no money and no revenue coming in. They asked about contributing to the plan from the their current employer but that entity is not a plan sponsor so that's not a good option.

Has anyone ever seen IRS require such a statement? It is not required for plan qualification. Plan document has standard "vested to the extent funded" language that mirrors 411(d)(3). I've terminated plenty of non-PBGC plans over the years that were distributed only to the extent funded.

This statement was not an amendment to the plan, and the DL makes no reference to it. Seems to me the best course of action for the sponsor is to distribute to the extent funded. Trying to get other funds into the plan at this point could create qualification issues. Paying to the extent funded does not create qualification issues.

Appreciate any thoughts.

[david rigby]

Jeepers (that is the technical term).

Not sure why the IRS would ask sponsor to sign such a statement. (It seems contradictory to the best interest of the IRS.)

I don't have an answer to your question, but suggest this plan sponsor needs advice from a competent ERISA attorney.

[jpod]

From the facts given it sounds like something which can be ignored with zero consequences, but I agree a lawyer should review.

[chc93]

shERPA... I would very much appreciate it if you could keep us updated with this issue.

[shERPA]

Not sure there will be much more information forthcoming to update. I appreciate the comments as they help validate what I am telling my client.

My firm did not handle this CB plan or the 5310 submission so I don't know the details of how this played out. I understand that for most practitioners it is often most expedient to give the IRS what they want in order to get a DL, and so long as the client is not harmed, why not? I've certainly done this, usually in the form of proposed amendment language that IMO is not necessary but doesn't actually change anything. Faster and less expensive to give in.

I am guessing the person interacting between the client and the IRS didn't necessarily understand that there would be no future source of funds available, or they might have pushed back when the IRS requested this. I know these folks and they are experienced and knowledgeable. I don't know if this is something that originated in the local IRS office or something from higher up. Frankly I don't have that many clients who want the delay of getting a DL on plan termination. This was submitted since it is a CB plan, and really the only issue was getting reliance for the plan document. All HCE participants, no other employees, no coverage or discrimination issues. Once we have approved volume CB plans I imagine there will be even fewer 5310 filings.

[Calavera]

I can only speculate that the IRS person was either not familiar with the rules, or tried to apply rules related to PBGC covered plans, since this statement is a part of a Standard Plan Termination for a plan covered by PBGC.